Monday, December 2, 2013

Ha-Joon Chang in conversation with David Pilling

I count “Lunch with the FT” as amongst my
favourite columns in the newspaper. Recently, FT columnist David Pilling
interviewed and had lunch with Cambridge economist Ha-Joon Chang, author of 23
Things They Don’t Tell You About Capitalism and Bad Samaritans: The Guilty
Secrets of Rich Nations and the Threat to Global Prosperity.

“The predominant view in the profession is
that there’s one particular way of doing economics. It’s basically to set up
some mathematical model, the more complicated the better,” he says, advocating
instead what he calls a multidisciplinary approach. “In a biology department,
you have people doing all sorts of different things. So some do DNA analysis,
others do anatomy, some people go and sit with gorillas in the forests of Burundi, and
others do experiments with rats. But they are called biologists because
biologists recognise that living organisms are complex things and you cannot
understand them only at one level. So why can’t economists become like that?
Yes, you do need people crunching numbers, but you also need people going to
factories and doing surveys, you need people watching political changes to see
what’s going on.”

On Freakonomics:

Doesn’t the success of Freakonomics (2005),
written by Steven Levitt and Stephen Dubner, disprove his notion that economics
is closed to new approaches? “They don’t get huge brownie points for writing
for the general public because a lot of economists have a very dim view of what
the general public can understand,” he says. “But the Freakonomics guys
are accepted as part of the mainstream because they have this very particular
view of human behaviour, which is ‘rational choice’. That is: ‘We are all
selfish, we basically do our best to promote our self-interest and that choice
is made in a rational way.’ ”“I don’t take that view,” he says, cramming
in a piece of lamb before he continues. “Rational thinking is an important
aspect of human nature, but we have imagination, we have ambition, we have
irrational fear, we are swayed by other people, we get indoctrinated and we get
influenced by advertising,” he says. “Even if we are actually rational, leaving
it to the market may produce collectively irrational outcomes. So when a bubble
develops it is rational for individuals to keep inflating the bubble, thinking
that they can pull out at the last minute and make a lot of money. But
collectively speaking…” His hands create a bomb blast above the cutlets.

On economic development:

Park Chung-hee had recently seized power in
a military coup. Korea
established a steel industry, a seemingly eccentric choice for a country
without iron ore (it had to import it from Australia
and Canada)
or coking coal. Yet steel became a foundation of Korea’s industrial success. Chang
believes that Park, though a dictator, made some smart choices and that the
only countries to have prospered are those that ignored the siren call of free
markets and comparative advantage – the idea that you stick to growing bananas
if you’re a tropical island – and planned their escape from poverty.Chang took those ideas with him to Cambridge in 1986, where
he studied first for a masters and then a PhD on industrial policy. His first
impression was how quiet England
was. “In those days, everything closed at five o’clock and nothing was open on
Sunday. Coming from Asia, it was like walking
into a ghost town.” But the UK
also had its charms: “I used to joke that I came to England
– not to the US
where most Koreans go – because I like Arthur Conan Doyle and Agatha Christie.”His studies consolidated his thinking.
Countries, he argued, needed to develop their capabilities, just as a child’s
potential is stretched in school. In 1955, for example, when General Motors
alone was producing 3.5m cars, Japan
had 11 or 12 manufacturers collectively producing 70,000. “From the short-term
point of view, it was madness for Japan to try to develop an auto
industry,” he says. “Except that the Japanese realised, ‘We will get nowhere if
we stick to what we are already good at, like silk.’”But can’t the protection of infant
industries go terribly wrong? In countries such as Argentina
and India,
closed economies led to lazy monopolies selling shoddy goods in the name of
self-sufficiency. Chang agrees. Only those states that forced their
entrepreneurs to compete internationally succeeded, he says. “In Bad
Samaritans, I have this chapter called ‘My Six-Year Old Son Should Get a Job’.
I’m trying to explain that the reason I don’t send this little guy to the
labour market is because I believe that it pays, in the long run, for him to
have an education rather than shining shoes and selling chewing gum. Protection
is given with a view to eventually pushing your companies into the world market
in the same way that you send your kids to school but [you] don’t subsidise
them until they’re 45.”

On the importance of moral philosophy:

Finally, I ask whether he thinks economics
is a moral pursuit. Chang’s starting point seems to be that economic policies
can make the world better. “Moral dilemmas are unavoidable,” he says as I
signal for the bill. “Don’t forget that, at least in this country, economics
used to be a branch of moral philosophy. Adam Smith, Karl Marx, Joseph
Schumpeter – they’re not just writing about economics, but about politics and
culture and society and morality.” He drains his cup. “How has this wonderful
subject we call economics become so narrow-minded? I find that really sad.”

The last paragraphs is of particular importance in my opinion. There is an assertion that economics, as it is practiced in most quarters, is value free and scientific. Despite unconvincing opinion pieces by the likes of Raj Chetty, it clearly is not. There is a literature on the methodological foundations of the discipline and a need to incorporate critical realism. But as a counterpoint, there will be dogged insistence from the high priests (like Larry Summers) that they have the insight and the answers (e.g. the necessity of asset bubbles). As we march ahead towards a combination or stagnation and asset euphoria we should ask why the policy prescriptions advocated in the past are simply palliatives and not the promised panacea.